Rule No. 12: Cash Is for Winners
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The aversion to cash in this business breaks my heart. Sometimes cash is such a perfect investment that it drives me crazy how few people ever recommend it. Nah, they hate the market so they are only 95% long instead of 100%. Or, they think the market stinks, so they decide to short a few highfliers against their longs.
No, No, No!You don't like any sectors? Sell everything and go into cash, don't short Advanced Micro Devices (AMD) vs. Intel (INTC) or Nortel (NT) vs. Lucent (LU). You don't think the market's going to do anything? Don't try paired trades, like General Motors (GM) vs. Ford (F), and don't buy defensive stocks like Anheuser-Busch (BUD) or General Mills (GIS). Just get out. So many people never want to get out and go to cash, which is literally short-term Treasuries of the less-than-a-year variety. People start talking about how little cash earns -- although it sure earned more than a year ago. Or they say, "Can't be in cash, that's for losers." But I say:
Cash is for winners.A lot of this cash aversion stems from something that occurred a decade ago, when (FMAGX) Fidelity Magellan underperformed because it had too much cash. As a result of the weak performance, the manager was fired! But no one ever seems to get fired for bad stock-picking. The takeaway in this game ever since that high-profile firing was: Don't dare get caught with too much cash. That's why you see and hear all of these fund managers who have lukewarm views walking around with massively long-biased portfolios. I grew up in a different time. I only shorted when I had an edge -- I can't short at all right now by contract, but back when I could, I didn't short just for the sake of having some shorts on against longs. I don't care about not having enough exposure; I care about losing money! If I were you and I didn't like the market or didn't have anything that compelling to buy -- as defined by a willingness to buy it down if the stock keeps going lower -- I would go with cash. It's never wrong when you don't like the tape or when you can't find anything that truly makes sense for you.
|1.||Pigs Get Slaughtered||2.||It's OK to Pay the Taxes|
|3.||Don't Buy All at Once||4.||Buy Damaged Stocks|
|5.||Diversify to Control Risk||6.||Do Your Homework|
|7.||Don't Panic||8.||Buy Best-of-Breed|
|9.||Defend Some Stocks||10.||Don't Bet on Bad Stocks|
|11.||Own Fewer Names||12.||Cash Is for Winners|
|Check back for more of Cramer's Rules|
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